Mortgage cuts are nearing

The anticipation of cuts in mortgage rates has been increased. Ulster Bank recently stunned the mortgage market with the first cut in its variable rate in more than a year. This recent decrease in its variable rates will increase savings for first time buyers. According to the Independent the typical first time buyer will be saving around €50 a month.

Tracker and fixed mortgage rates are also supposed to fall. There are increasing expectations that the European Central Bank (ECB) will also cut key rates. Cutting key rates will allow banks to reprice their mortgage books. Mortgage rates are being cut in response to weak growth within the Eurozone and inflation declining.

As of yesterday, the European Commission lowered its forecast for growth again. The lowering of growth forecasts contributes to greater pressure on the ECB to cut interest rates it charges banks.

Ulster bank is dropping one of its key variable rates by .4%. The new key variable rate is defined as 3.9% for those whose loan is less than 90% of the properties value. This has a huge impact on those with mortgages. For example, a first time buyer with a mortgage of €225,000 could save over  €50 a month under the new key rate.

The Ulster Bank rate is still considered relatively very high, it is the first time in over a year that a bank has cut variable rates. Banks such as AIB, Haven and Finance Ireland lowest variable rate mortgages all amount to 3.15%. In comparison, Ulster Bank rates greatly exceed other rates. However, experts have claimed that this is likely to force other banks to cut variable rates, and thus causing a renewed mortgage price war.

Currently, banks are competing based on fixed rates, which are also supposed to decline. Philip O’Sullivan, an economist, stated that money markets are now pricing in a chance of a cut in the ECB’s main lending rate. The main lending rate is known as the refinancing rate which is currently at 0%. O’Sullivan noted that the refinance rate could be moved to negative 0.1%. A negative refinancing rate means that someone with a tracker rate set at 1% above the ECB rate would be then charged 0.9%. If the ECB decreases its refinancing rate to -0.1%, tracker customers owing €300,000 could have savings around €170 a year.

Redefining the ECB’s refinancing rate would also directly tracker rates and likely influence variable rates. The decline in rates is beneficial towards borrowers but not as beneficial for savers. According to economist Brandon Burgess, the Central Bank has defined that variable rates are the second highest amongst the eurozone. If the ECB cuts rates, Ireland would no longer have some of the highest rates in the eurozone.

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